WSFS Financial Corporation (WSFS) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to WSFS Financial Corporation Second Quarter Earnings Call. [Operator Instructions] I'd now like to turn the call over to your host for today. Mr. David Burg, Chief Financial Officer. Sir, please go ahead.

Thank you very much, and good afternoon, everyone. Thank you for joining our second quarter 2026 earnings call. Our earnings release and an earnings release supplement, which we'll refer to on today's call, can be found in the Investor Relations section of our company website. With me on this call is Rodger Levenson, Chairman, President and CEO. Prior to reviewing our financial results, I would like to read our safe harbor statement. Our discussion today will include information about our management's view over future expectations, plans and prospects that constitute forward-looking statements. Actual results may differ materially from historical results or those indicated by these forward-looking statements due to risks and uncertainties, including, but not limited to, the risk factors in our annual report on Form 10-K and our most recent quarterly reports on Form 10-Q, as well as other documents we may periodically file with the Securities and Exchange Commission. All comments made during today's call are subject to the safe harbor statement. I will now turn to our financial results. During the second quarter, WSFS's performance continued to demonstrate the strength of our franchise and diverse business model. Results included a core earnings per share of $1.66, core ROA of 1.55% and core return on tangible common equity of 20.2%, which are all above the first quarter levels when you exclude the previously disclosed loan recovery. On a year-over-year basis, core net income increased 19% and core PPNR increased 10%, resulting in core earnings per share growth of 31% and tangible book value per share growth of 13%. Core results for the quarter exclude a $1.8 million decrease to net income and a $0.03 reduction to EPS, primarily related to the write-down of an equity investment as well as the previously disclosed gain from the sale of our credit card portfolio. Net interest margin expanded 4 basis points linked quarter to 3.87%, driven by a 4 basis point reduction in our client deposit costs as well as higher investment securities and yields. Our interest-bearing deposit beta remained at 46%. Core fee revenue, which represents nearly 1/3 of total revenue, grew 2% linked quarter and 5% year-over-year. The growth across our fee businesses was led by Wealth and Trust, which grew 17% year-over-year. Within Institutional Services, Corporate Trust and Global Capital Markets were up 28% and 58% year-over-year, respectively, as we continued to win new mandates and capture market share. For the first half of '26, WSFS was ranked as the third most active ABS and MBS trustee based on deal count, increasing our market share to 14%, from 11.7% in 2025. Our personal trust business, The Bryn Mawr Trust Company of Delaware, also delivered strong year-over-year growth of 20%, driven by continued new account growth. Outside of wealth, our capital markets business within the Commercial division also delivered strong double-digit growth both linked quarter and year-over-year. Cash Connect fees declined year-over-year due to the impact of interest rate cuts and lower volumes, but the business delivered a higher profit margin of 15% for the second quarter in a row. Client deposits increased 3% linked quarter driven by growth in Institutional Services and Commercial. On a year-over-year basis, our client deposits are up 11%. Importantly, noninterest deposits were up 10% linked quarter and now represents 37% of total client deposits, up from 31% a year ago. While we continue to see some elevated quarter-end activity by clients, we are seeing strong deposit growth momentum as evidenced by increases in both end-of-period and average deposits, which also grew 3% linked quarter and 8% year-over-year. Gross loans were up 1% linked quarter or 5% annualized. In Commercial, we continue to see strong momentum in C&I which grew 2% linked quarter or 8% annualized. And in Consumer, home lending generated strong growth, with residential mortgage and WSFS home equity loans up 10% linked quarter and 23% year-over-year. Turning to asset quality. We continued the recent trend of improvements across our key metrics, key metrics including leading indicators. Problem assets decreased 6% linked quarter due to several commercial payoffs and are now down 31% year-over-year. Delinquencies are down 5% linked quarter and nearly 40% year-over-year, with accruing delinquencies of $26 million as of quarter-end. Nonperforming assets are down 8% linked quarter and nearly 25% year-over-year. In addition, net charge-offs were $7.1 million or 21 basis points of average loans for the quarter. When you exclude the impact of the prior quarter loan recovery, net charge-offs decreased $5.1 million quarter-over-quarter, driven by lower Commercial charge-offs. During the quarter, we continued to execute on our capital return framework, returning $77 million of capital, including $66 million of buybacks. Year-to-date, we repurchased over 4% of our outstanding shares and returned approximately 100% of net income to shareholders. On the last page of the earnings supplement, we provided our updated 2026 outlook, which now assumes no Fed funds rate changes for the rest of the year. Our updated full year outlook reflects improvements across most metrics. Notably, we're increasing our ROA outlook for the year to 1.50%, with potential upside from there as we continue to drive high performance and growth. We also raised our deposit growth rate from mid to high single digits. While our results reflect some elevated quarter-end transactional activity, we continue to see strong deposit growth momentum across Institutional Services and Commercial. Our NIM outlook has improved to approximately 3.85%, reflecting the updated rate forecast and momentum across deposits and loans. We continue to see elevated deposit competition, which may impact deposit pricing going forward. We raised our outlook for fee revenue, excluding Cash Connect, from mid to high single digits as we continue to see strong momentum and future growth opportunities in our fee businesses, and particularly Wealth and Trust where we continue to capture market share within Institutional Services and BMT of Delaware. Net charge-offs are now expected to be between 15 to 25 basis points of average loans for the year, a decrease from our previous outlook, which reflects the strong asset quality results we saw in the quarter and recent momentum across key leading indicators. Consistent with our first quarter update, this outlook includes the previously disclosed recovery in 1Q. Our Commercial portfolio continues to perform well, but losses may be uneven. Our outlook for efficiency remains unchanged. We plan to maintain strong expense discipline, but we'll continue to leverage opportunities to invest in the franchise, which, coupled with normal seasonality, may result in some variances quarter-to-quarter. We're pleased with these results and remain committed to delivering high performance. And we'll now open the line for questions.

[Operator Instructions] Your first question comes from the line of Russell Gunther with Stephens.

It looks like it implies relative stability in the back half of the year. We're getting towards the end of earnings this week and a lot of the commentary so far is focused on margin headwinds for the industry, a tighter spread, higher deposit costs. But when I look at your guide's liquidity profile in terms of the below peer loan to deposit ratio, a lot of securities cash flow, you can get reinvested better than peer noninterest-bearing mix that's growing. I think you guys would be better able to defend against competitive pressures, at least on the liability side. But David, how are you guys thinking about the trajectory of deposit costs from here as what's reflected in the margin guide and as we think about '27?

Yes, happy to address that. So I think you're right. I think we've obviously had success in bringing down our deposit costs so far. We have a good liquidity profile. And in fact, we've let some of our higher-cost deposits run off in the first half of the year, as you can see in some of our CD runoffs. So because of our liquidity position, we were able to do that. At the same time, I think there are 2 factors to consider. One is we are, and we've been seeing it really throughout the first half of the year, there's definitely more deposit competition out in the market. And we've seen that really build up over the last 6 months. To give you one example, our largest [ dep ] product was a 6-month 3% CD. And we found ourselves to be really on the low end of market pricing. And if you go out, it's very easy to get over 4% for 12 months. And so we want to make sure that we remain competitive. Even though we don't necessarily need the liquidity today, we obviously want to continue to grow our clients. We want to defend our market share and capture more share. We want to remain competitive. So I think we will -- we do have to -- we may need to increase in order to grow in some areas and be competitive. And so that does put some pressure on our deposit costs going out. But expect the NIM to be stable and we expect to be able to manage that, but there could be some upward pressure on deposit costs.

Got it. Okay. And then switching gears to expenses. I appreciate the reiterated high 50s efficiency guide. As it relates to just kind of dollar noninterest expense, you referenced seasonal dynamics. So could you level-set us in terms of how 2Q may compare to where 3Q is headed? And then within that kind of high 50s target, I mean what does that mean to you? Is there a plus or minus to that? You guys were at like 59.3, I think, last year. Is that some -- is that a result you might be able to outperform?

Yes. So in terms of expenses, this quarter, when you look at our expenses year-over-year, are up about 4%. So I think it's a reasonable growth rate. When you look at this particular quarter, the majority of our quarter-over-quarter expense was really driven by variable and revenue-driven expenses. So it's really a direct result of the outperformance on the top line. Although we did have some items, some nonrecurring items hit, that we've outlined in our press release. Generally, I think our expenses could be at this level, around this level, maybe a little bit lower going forward. But the important thing is a big part of that is revenue driven. And so to the extent that we continue to outperform on the fee side, on the top line side, that will drive additional expenses. So we do think of it, as a result, you can't disassociate the revenue from the expenses, and so we do think of it in terms of efficiency. As you said, we were over 59% last year. We want to continue to tick that down. We've been 58% for the last 2 quarters. And we're comfortable in the range that we're at. And over time, our goal is to continue to tick that down. And we've got a number of expense initiatives that are ongoing. We think about it a lot. Part of our strategy, by the way, around expenses, is, as you know, we've been exiting some non businesses that are not central to our strategy, and that's been an important driver as well. And so overall, I think we'll continue to invest in the business. That's really the number one priority, while maintaining discipline. And so I think around this efficiency level is where we would expect to be.

Okay. No, that makes a ton of sense. And then I guess just last one for me. The 1.50% plus, that plus sign there in the ROA target, what are the biggest deltas to achieving that?

Yes. So I think we put the plus there because we'd like to come in a little bit better than that, not materially better. But obviously, continued outperformance in fees, if we continue to get some of the deposit growth. But again, it's a competitive environment. It's not -- the deposit growth we've seen, I think, is hard to continue at this level. And so that's where some of the pluses and minuses come in.

Your next question, from the line of Kelly Motta with KBW.

This is Meghan Lynch on for Kelly Motta. So loan growth was very solid this quarter, and you're expecting this growth to sort of continue. So can you speak a bit to how pricing is coming in, especially with competition, and if this competition is pressuring your prices at all?

Sure. Happy to talk about that. And I'll maybe split the discussion between Commercial and Consumer. On the Commercial side, as you know, really our core strategies to grow our C&I business. That's the business that drives our relationship. It's a very important contributor to our deposits, in our noninterest-bearing deposits. And so that's really kind of our flagship product. C&I has always been very, very competitive, and continues to get very competitive as others try to penetrate the space. We're not the low-cost provider in the market. We really separate ourselves based on our service model. Obviously, we need to be competitive, but we separate ourselves based on service, based on our responsiveness and our relationships. And so we want to make sure we grow in a reasonable, accretive way, and that's what we've been doing. And so expect our goal is to continue to grow at kind of mid-single digits through the cycle. On the Consumer side, our loan strategy, what we've really done is try to focus on areas where we have a differentiated value proposition. And so you've seen us get out of -- we sold also our portfolio last year, we sold our credit card portfolio this year, and really focused on residential lending. In residential lending, we really have a differentiated product there with our service model and our ability to work with different types of clients. But the pricing there, because of the move in rates that we've seen, the pricing, obviously, on the residential real estate side, has gotten more challenging. So I think that's a market dynamic overall.

That was very helpful. And then just switching sort of to credit. You saw some improvement this quarter and the trends seem very solid. Is there anything -- what are you seeing more broadly? And is there any place that you're watching in your portfolio?

Yes. As you mentioned, we've seen -- we've had good credit performance. We take a very proactive approach to credit. We spent a lot of time on it, where we try to get out early in front of any issues that may appear and work with our clients to resolve any potential issues. As you look at the portfolio, there's nothing that -- there are always individual challenges with particular clients and particular situations, but there's not a kind of a big red flag when we look across or a theme or pattern. Office continues to be a challenging market and challenging prices, and we try to be very selective there. But generally, nothing new in terms of any red flags where we can connect the dots across different types of asset classes.

Your next question from the line of Manuel Navas with Piper Sandler.

Could you add a little more color on the OpEx discussion. You said there could be some potential variability. And in the prior conversations, it sounded like there could be a downward trajectory. But what are some of the projects and things that you need to -- that add that kind of variability within OpEx? Or is it just a variable comp supporting revenues?

So part of our cost base, Manuel, is variable. And so whenever we have revenue outperformance, we're going to see some additional expenses. Some of that is IC, and that was a meaningful part this quarter. We also have transaction expenses, for example, in Cash Connect, we have transaction expenses in our trust businesses. And so a portion of that revenue is definitely going to result in higher expenses. At the same time, we continue to, if you look at our core expense base and our base expense level, we continue to try to work that down and continue to try to have initiatives to offset general rising costs, inflation and medical expenses and those type of things. And we have a number of ongoing initiatives. Like I mentioned, some of that has been getting out of businesses that were not central to our strategy that had expenses associated with them, that were not highly profitable businesses. We've really optimized our real estate portfolio. We have a successful initiative going on around vendor costs. So we've got a number of different initiatives that are offsetting some of the natural increases, which is how we get to a 4% year-over-year growth, but the revenue is going to drive some expense with it.

Yes, Manuel, I just would add to what David said. I think where the variability could come into play is, as David said, medical costs, healthcare costs are a big topic and I think will continue to be a big topic, although we're doing, I think, a very good job of managing that. And like many others, we continue to periodically see fraud spike from different events. So I think while we're in a good place, there's always some opportunity that we may see a little bit elevated costs in those 2 areas. And to me, that's really where some of the pressure on driving it down that we can't point a finger on right now could occur.

I appreciate that. Shifting over to loan growth, a little bit more that guide here in the back half of the year, mid-single digits. Can you just talk about the main drivers there and what you're seeing in the marketplace from your borrowers, in terms of sentiment pipelines and things like that?

So I'll talk about sentiment. I've been at -- a fair bit over the last several weeks. And I would characterize client sentiment as very good. I think they're definitely dealing with some headwinds on the cost side. But all of that, what I would say, the uncertainty, geopolitical events, energy volatility, those kinds of things, I think they've kind of either come to accept there's going to be a certain amount of uncertainty, or an ability to adjust their businesses based on what they dealt with last year if there's a sudden spike in one cost here or there. So I think that's translating into businesses feeling pretty good and investing, which should be really good for us on the C&I side. And people are seeing the benefits of an overall stable economy. And so that's the environment where businesses like to grow and invest, and we should benefit from that. And so that's a big driver of our pipeline and where we're seeing opportunities. And as you know very well, in our marketplace, particularly as you move up the curve in terms of medium-sized businesses, lower end of middle market, really competing against much larger competition, and we find that, as David has said, our service proposition plays very well into those kinds of clients. And so growing with our clients as well as taking market share are really the 2 drivers of where we see loan growth for the rest of the year.

And Manuel, I would just add that on the consumer side, a large part of our growth this quarter came from our home lending business. We had a -- we had really a strong pipeline at the end of the first quarter into the spring selling season, also some of the lower rates that happened earlier. But now we're reaching a little bit of a slower part of the season and rates have ticked up, so the pipeline has come down a bit. So wouldn't expect the kind of growth that we've seen in home lending not necessarily to continue, but still expect to be able to do well there.

I appreciate that. Switching over to deposits. So really strong first half of the year. I think that's a big part of the higher guide. Is some of the discussion points around NIM and around competitive pressures on deposits, is it because some of the noninterest-bearing could flow out? Could you kind of talk about the noninterest-bearing growth, which is great, Institutional Services kicking back. But I'm just wondering how much of that is sticky? How much of that are kind of preparing for it to flow out, if any? Just talk about the noninterest-bearing side a little bit and how it impacts your deposit costs in general.

Yes. Happy to do that, Manuel. So yes, I think when you think about our noninterest-bearing, really the important thing to understand is that those deposits are really spread across a few businesses. They're spread across commercial, consumer and institutional services. And within Institutional Services, there are actually 2 businesses important contributors there: our Corporate Trust business where -- which focuses on the ABS and MBS markets; as well as our Global Capital Markets business, which focuses on bankruptcy, distressed debt, high-yield debt, corporate issuance. Both of those -- all 4 of those businesses are important drivers. And when you think about this quarter, probably about 80% of the NIB growth was within Institutional Services split across both of those businesses, and 20% was in Commercial. So all of them are important drivers. The competition that we're seeing is there are different drivers for each of those businesses in terms of deposit expectations. The competition that we talked about that we're seeing is really on the -- in the Consumer space and in the Commercial space, we're definitely seeing more deposit competition in the market. And that may impact both NIB growth as well as pricing going forward. And on the trust side, we benefited from a very strong market and we've been able to capture share. But again, those are transactional activities and would not expect the kind of growth that we've seen to necessarily continue.

I appreciate that. Let me just add one more on kind of capital return. Really strong buyback activity. Is there a point where you become more price sensitive or you still have so much capital return? And where does buyback stack up with other opportunities you have to deploy across organic growth, M&A? Just kind of some updated thoughts here.